I've been asked for advice on the following situation.

An IRA owner under 59 1/2 begins receiving equal periodic payments when the account value is $1,000,000. He receives two or three years of payments under the amortization method.

Through poor investing, he drives the account value down to $80,000. If he takes this year's payment, the account will zero out.

Next year, there's no money to take his required payment. Is this a modification subject to recapture?

I don't remember the details in the reg's specifically but you have to revalue each 12/31 or 1/1 to determine that year's payments. The amount of minimums may vary according to investment results and the anuity table. So, in my experience, you are not dealing with a fixed amount each year.

My understanding of the amortization method is that you take the account balance at or near the date payments are to commence and divide it by an amortization factor based on reasonable interest and life expectancy (basically, a loan calculation). Under this method, once calculated, the payment remains the same until 59 1/2 or 5 years if later.

Chip, your understanding of the amortization method is correct. The payment amount is determined at the time payments are to begin, and they don't change.

With respect to your original question, I don't recall seeing any PLR or other IRS missive that addresses running out of money so quickly. I would like to believe, however, that the Service would understand that, when the account has been depleted, no additional income payments could be made, regardless of whether it happens in three or thirty years.